. As Committee increases MPR to 14%
Clara Nwachukwu
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), has said it will continue to tighten rates as long as necessary if inflation rate continues to accelerate uncontrollably.
Accordingly, the Committee at the end of its meeting for the month of July yesterday unanimously voted to raise the Monetary Policy Rate (MPR) further by 100 basis points to 14% up from the 13% agreed at the last meeting, as the last increment was not able to tame inflationary trends.
All other parameters, including the asymmetric corridor at +100/-700 basis points around the MPR; the Cash Reserve Ratio (CRR) at 27.5%; and the Liquidity Ratio at 30% were retained at current levels.
CBN Governor, Godwin Emefiele, clarifying the MPC’s decision to increase the benchmark interest rate yet again after a 150 basis point increase during the June meeting, said the move is to moderate inflation acceleration.
He said: “Inflation is eroding the purchasing power of citizens of the country, particularly the weak and the vulnerable, and the poor. By the time inflation weakens the purchasing power of the vulnerable; naturally it would also lead to heightened unemployment and would ultimately retard growth.
“…I believe that if inflation continues at this rate, we will continue to tighten, because that is the only thing that I can see at this time. Whereas we are doing everything possible from the CBN to look at the various other measures that can be used to moderate inflation, improve farming, hoping that farming output will be better.
“We are hoping that when the harvest eventually sets in sometime in August or September, even October, we may begin to see moderation in food prices that will help to see a moderation of inflation. If we do not do so, I cannot promise, MPC cannot promise anybody that we will not continue to increase rates.”
By the time inflation weakens the purchasing power of the vulnerable; naturally it would also lead to heightened unemployment and would ultimately retard growth.
Higher cost
Admitting that the decision to hike MPR further by 100 basis points will increase the cost of borrowing and also weaken manufacturing output, Emefiele insisted that checking inflation overrides any other argument.
He added: “We agreed with that postulation but the important thing is that at a level that can retard growth, inflation must be dealt with while at the same time we are looking at how to use development finance tools to continue to push towards improved output growth.”
Justifying the rate increase, the CBN Governor said it was an “attempt to pursue a policy of price stability that is conducive to growth. We have tried over a couple of meetings to leave rates the way they are, while at the same time we are pushing hard on how to improve output growth.
“But with the aggressive acceleration of the inflation rate in Nigeria, we decided in May, after almost two and a half years, to raise the rate by 150 basis points.”
…as a result of rising inflation, supply chain problems and the rest, most of the developed economies are already facing a threat of recession.
Global economy
Besides, Emefiele noted that global events occasioned by weakening purchasing power due to rising food and energy prices, disruption in supply chain and other upheavals have necessitated general tightening of rates in most economies.
He continued: “Like you’ve all noticed, globally, since the beginning of the year, there has been heightened level of inflation all over the world to the extent that we see even in the developed economies the fact that as a result of rising inflation, supply chain problems and the rest, most of the developed economies are already facing a threat of recession.
“Both the US, the EU and some other economies suffered massive declines in their output. In the US, it was a negative output during the first quarter, and if the United States witnesses a second decline in the second quarter in output, naturally, it means that the US will also go into recession.
“The fear unfortunately is that this may happen after the second consecutive negative output in the United States. And that is the reason why when we come sometime to the MPC and say that we have to be very careful about the rate of acceleration in prices or inflation. It is a very serious matter that Monetary Policy Committee members take very seriously because what you find is that as inflation continues to trend aggressively higher, it will no doubt adversely begin to retard growth of any economy.
“Like you may also have observed, most of the countries of the world, both the developed and developing economies have had to embark on very aggressive rate increases to dampen the effects of inflation.”
Rates tightening
To underscore his point, Emefiele cited other countries where rates have been hiked many times since early this year due to galloping inflation, compared to COVId-19 pandemic levels in 2020.
- US Fed increased rates four times, inflation was 2.5% in 2020, but now 9.1%;
- EU hiked rates more than two times as inflation rose from about 1.4% in 2020 to 8.6% in 2022;
- Brazil increased rates five times, inflation spiked from 4.2% in 2020 to 11.89% in 2022;
- UK moved rates up four times as inflation advanced from 1.8% to 9.1%;
- In Egypt, Africa, rates were moved three times as inflation rose from 7.3% in 2020 to current 13.2%; and,
- Ghana increased rate three times this year, inflation had moved up from 7.8% in 2020 to over 29% today.
Emefiele continued: “For our own review, if we have to do a concurrent analysis, in 2020, Nigeria’s inflation was 12.13%. Today, the last data released just about a few days ago put inflation at 18.6%, and because of the way it was rising, we knew that something must be done to rein-in inflation.
“We conducted a very serious analysis looking at various data that was presented to us at this meeting. We felt that there is the need, not just because we want to look at what other economies are doing but also the fear that whereas we are seeing some output growth as a result of substantial work we are doing in development finance that we need to really rein-in inflation. We need to do a lot more work on inflation.”
The MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its last meeting, and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.
Committee’s decision
In the Communiqué issued at the end of the meeting and read by the Governor said: “The MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its last meeting, and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.
“As regards the decision as to whether to tighten, loose or hold, Members were unanimous and so did not consider both loosening and retaining rates at existing levels at this meeting. This is because on loosening, the MPC felt it could worsen the existing liquidity condition in the economy and further dampen money market rate, necessary to stimulate savings and investment. Members also felt that loosening would trigger the weakening of the exchange rate which could pass through to domestic prices.
“The MPC did not also consider retaining the policy rate because a hold stance may suggest that the Bank is not responding sufficiently, to both the global and domestic price development, as inflation numbers continue to trend aggressively upwards.
“As regards tightening policy stance, Members were unanimous that given the aggressive increase in inflation, coupled with the resultant negative consequences, particularly on the purchasing power of the poor, as well as retarding growth, there is the need to continue to tighten.
“However, the policy dilemma was hinged around the level of tightening needed to rein-in inflation, without dampening manufacturing output, which could result from the higher cost of borrowing.
“Aside from narrowing the negative real interest rate gap, Members were also of the view that tightening would signal a strong determination of the Bank to aggressively address its price stability mandate and portray the MPC’s sensitivity to the impact of inflation on vulnerable households and the need to improve their disposable income.
“Members also noted that the 150 basis points hike by the Committee in May 2022, had not permeated enough in the economy to halt the rising trend in inflation and noted that the month-on-month percentage point increase in headline inflation rose sharply in June 2022 compared with May 2022.
“The MPC also noted that other complementary administrative measures deployed by the Bank to address the growth in money supply did not moderate the inflationary trend.
“Addressing the balance of policy objectives and developments in the global and domestic environment, the Committee resolved that the most rational policy option would be to further strengthen its tightening stance in order to effectively curtail the unabated rising trend of inflation.
“Members were conscious of the fact that output growth remained fragile, however, not curtailing inflation now could erode the moderate gains achieved in improving consumer purchasing power and thus worsen poverty level for the vulnerable populace. To ensure that output still remains in focus, the MPC advised the Bank’s Management to continue to use its development finance tools to support the agricultural and manufacturing sectors.”
